Trump to give tax reform address in Indiana on Wednesday
President Trump and Republican leaders plan to cut the top tax rate for the wealthiest Americans to 35% and significantly reduce taxes on big and small businesses, according to details leaked to Axios and first published by the Washington Post (link).
GOP leaders and the White House plan to cut the top tax rate for small businesses — known as “pass-throughs” — from 39.6% to 25%. (Currently small businesses pay the same tax rates as individuals, and this puts them at a disadvantage to larger corporations, which pay lower rates.)
Most Democrats have signed a letter saying they wouldn’t support any tax bill that adds to the deficit or offers new tax breaks to the wealthiest Americans.
President Trump is planning to give a speech unveiling the framework in Indiana on Wednesday. Final details are expected to change substantially as it goes through the normal legislative processes in the House and Senate.
The details of the plan, according to the Washington Post and Axios:
- Top individual tax rate cut from 39.6% to 35%. The current seven income tax brackets would be collapsed to three, as part of simplification. (No details yet on the other two rates.)
- Cut the corporate tax rate from 35% to 20%. President Trump has previously said he wants the corporate rate to be 15%.
- Provisions to prevent wealthy people from artificially lowering their income taxes by rearranging their affairs to get taxed at the small business rate.
- Double the standard deduction. which is expected to lead to more people taking the standard deduction and many fewer itemizing their tax returns.
- “Full expensing,” which permits businesses to fully deduct their capital expenses immediately rather than writing off their depreciation over the course of several years. But the provision will not be permanent but will sunset after five years due to its cost.
Under current law, pass-through businesses include partnerships, limited liability companies and S corporations. The income they earn doesn’t face the corporate income tax and then a potential second tax layer on capital gains or dividends; instead, it passes through to owners’ tax returns and is taxed at their individual rates. Such firms reported more than 40% of net business income in 2014, according to the congressional Joint Committee on Taxation.
Republicans have been reviewing alternatives for defining the line between wage and business income. One option would assume that 70% of pass-through income is taxable at the wage rate and 30% at the lower business rate. But Treasury Secretary Steven Mnuchin said certain service providers wouldn’t get the lower rate. He named accountants specifically, but others could include doctors, lawyers, consultants and architects.
